Understand what's in your contract
Posted on 28th January 2022 at 11:54
For sub-contractors, contracts can be complex and potentially cause huge headaches if you don’t fully understand them.
At SubPort we disclose and explain the content of contracts to our sub-contractor clients to ensure clauses that might lead to loss of profits or legal complications are avoided. As an award-winning quantity surveying consultancy, we understand the pitfalls and help to navigate sub-contractors like you far away from them.
We know that two areas of particular concern for you as a sub-contractor are payment terms and retentions.
Payment terms for sub-contractors
You should always be clear on the consequences of the payment terms you agree to. Payment terms in sub-contractor contracts are complicated.
Whereas in other sectors a worker would expect payment terms to simply state the number of days in which an invoice will be settled, in the construction sector the format is different.
This is because construction contracts are written to comply with the Construction Act. Within contracts the series of dates can be written in word form or included with an appendix as a payment schedule.
The confusion for sub-contractors begins when the contractor only draws attention to one of the dates in the contract and ignores the others.
To explain, the following dates are found in contracts:
Application due date
Final payment date
If the payment terms are presented in a summary in the contract as, “Final date for payment 30 days” it might be assumed that the payment terms are 30 days. However, only one part of the period is mentioned in the summary whereas the full payment terms are mentioned elsewhere.
As such if the contract payment terms actually state in full, “Application due date is 30 days from the application date…. final date for payment is 30 days following the due date”, in this case the payment terms are actually 60 days.
Examples of payment terms
Here is an example of payment terms. As mentioned above, it uses both periods, not just one:
“PAYMENTS BECOME DUE 21 calendar days following the date of application. FINAL DATE FOR PAYMENT IS 35 calendar days following due date.”
Another example is:
“The date a payment becomes due is 14 days after the end of the month following the issue of the respective certificates and the final date for payment in relation to any sum which becomes due shall be as stated in Part 12 or if nothing stated is 28 days from the date when that sum becomes due.”
It might look unnecessarily complicated but when you break it down you will see that both dates have to be added together. To make things even more complicated, in some contracts these dates are written in the same section but several clauses apart!
Contracts from main contractors often include a schedule of payment dates, to make it easier to understand the application date and the actual date the payment is due in the bank.
It’s important to discuss payment terms with a quantity surveying consultancy such as SubPort to ensure you fully understand what you’re signing up to. Once agreed it is highly unlikely the payment terms can be changed. We can provide a pre-award contract review to determine where there might be risk and review the terms and conditions on offer.
Retentions that entitle main contractors to withhold a percentage of a payment to sub-contractors until the entire works are complete and defects are made good, have come under a lot of scrutiny over recent years. The Construction (Retentions and Abolition) Bill 2021-22 is in the process of being read. This move to abolish retentions says a lot about how unfair they are to sub-contractors. It’s a complex area on which you should seek professional advice.
At SubPort we know that many sub-contractors struggle to recover this much needed income, with the recovery process being very time consuming and frustrating. In truth, many sub-contractors give up on collecting the money owed which obviously affects profitability and cash flow.
Typically we see contracts with 5% retention held. We recommend that sub-contractors challenge this and only agree to 3%.
Furthermore the terms around the release of the retention percentage is very biased in favour of the main contractor. Incredibly, SubPort has seen retention payments held for 36 months although it is now typically becoming 24 months. We recommend that sub-contractors should only accept 12 months with the retention reducing by 50% on practical completion (when the project is handed over to the client).
At SubPort we can mitigate the delays and represent you in collecting the money. In many cases just the fact that we’re involved in the process can prompt main contractors to settle the outstanding amount. We have an excellent rate of recovery which helps to free up your time to concentrate on the rest of your business.
Get in touch
If you are a subcontractor in need of professional advice regarding contracts, please get in touch with the team at SubPort by calling us on 0333 200 7205 or using our contact form.
We can also support subcontractors with estimating and tendering, valuations and cost management, valuations of variations, contract reviews and dispute resolution.
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